Ernst & Young has failed to live up to the quality control expectations of the Public Company Accounting Oversight Board, prompting the board to lay bare the full details of unflattering findings that were originally kept out of a 2010 inspection report.

The PCAOB found in July 2010 that E&Y's system of quality control might in some ways fail to assure that the firm's audit work would meet required standards. Inspectors noted a troubling number of instances where auditors failed to push back on management estimates, leading inspectors to conclude the firm's own quality controls aren't effective in that area. Inspectors said the number of failures raised questions about whether the firm sufficiently supervises its auditors, whether its concurring partner reviews are adequate, and whether the firm is doing enough to audit areas where it identified a risk of fraud.

In accordance with Sarbanes-Oxley, the PCAOB published the report initially in July 2010 with the quality control concerns removed from the report. Firms are given 12 months to address those concerns quietly. If the PCAOB still is not satisfied after the firm has spent 12 months working on the problems, then the board is permitted to published the original concerns in a full inspection report. E&Y is the third major firm to see its quality control criticisms published, flagging dissatisfaction at the PCAOB over how the firm responded to those criticisms in the year allowed to address them. The board has published nearly 150 expanded reports overall, including a 2008 report for Deloitte and 2009 and 2008 reports for PwC.

The PCAOB says its July 2011 review determined E&Y had not adequately addressed the board's quality control concerns. Nearly two years later, the board has now published the expanded findings, explaining how numerous audit failures followed a theme that suggested problems in the firm's quality controls. The PCAOB says E&Y determined it would not pursue the issue further with the Securities and Exchange Commission, which the firm is entitled to do under Sarbanes-Oxley.

In a statement attached to the PCAOB release, the firm says it believes it took “significant remedial actions” with respect to the board's findings, including significant enhancements to resources, policies, and practices. “In each of the areas noted, we have provided our audit professionals with new audit tools, additional training, and expanded technical guidance,” E&Y says. “These efforts have been beneficial generally and continue to improve our execution. Overall, we have invested thousands of partner and staff hours on these issues and believe we approached each board criticism seriously and responsibly.” Still, the firm acknowledges it can continue to improve.

The firm also points out that the PCAOB's determination to publish 2010 quality criticisms says nothing about anything that may have taken place from July 2011 to the present.